Kennametal reports lower profit, cuts outlook

BobTita

--Company says customers worried about outcome of U.S. presidential election

(Updates with more details through. Comments from company executives and analyst.)

Kennametal Inc.'s
KMT, -1.75%
fiscal first-quarter profit tumbled 36% from deteriorating demand for cutting tools that the company attributed to customers' uncertainty about economic conditions and political leadership in the U.S., China and Europe.

Kennametal's sales and profit from the quarter came in well below expectations, causing the company to slash its outlook for 2013. Kennametal now expects total sales growth of 3% to 6% above 2012, compared with its prior prediction of sales growth of 7% to 10%. The company now expects earnings in a range $3.40 and $3.70 a share, down from its earlier forecast of $4.10 to $4.40 a share. Wall Street analysts had been expecting the company to earn $4.15 per share.

The Latrobe, Pa., company manufacturers drill bits, taps and cutting inserts used in metalworking machinery, drill rigs and earth-moving machinery. The company's customers include the auto builders, aircraft manufacturers, oil and gas producers and construction companies.

"People got really nervous," said Chairman and Chief Executive Carlos Cardoso during a conference call Wednesday with analysts. Demand, "especially in the last two weeks of September, declined unexpectedly. I think everybody was surprised."

Mr. Cardoso blamed the sales slowdown on customers' growing concerns about the outcome of the U.S. presidential election and pending cuts in federal spending early next year; the once-in-a-decade leadership change in China; and Europe's ongoing struggles with sovereign debt and economic growth.

Kennametal relies on industrial supply distributors, including Fastenal Co.
FAST, -0.87%
and MSC Industrial Direct Co.
MSM, -0.04%
to sell its products to a portion of the company's customer base. Kennametal executives said distributors have pulled back on their purchases to reduce inventories that have recently swelled in the U.S. and Europe.

"Customers have temporarily postponed orders and have been destocking inventory," Chief Financial Officer Frank Simpkins said. "We believe there is pent-up demand and that the distribution channels can accelerate quickly once there is more certainty" following the outcome of the U.S. presidential election next month.

The company expects about 65% of its income for fiscal 2013 will be generated in the second half of the year, suggesting that its first-quarter results are likely to be the weakest of the year.

In the company's industrial segment, which primarily supplies manufacturers, sales during the quarter fell 15.5% from a year ago to $353.2 million, while the unit's operating income plunged 51.5% to $35.2 million on lower sales volumes and unfavorable currency exchange rates. The unit's operating margin slipped to 10% from 17.4% a year ago.

The company's infrastructure segment, which is focused on mining, energy and construction sectors, reported a 14.6% increase in sales to $276.3 million with help from the company's recent acquisition of U.K.'s Deloro Stellite Holdings. Operating income slipped 2.5% to $31.7 million as the unit's operation margin was roughly flat at 13.2%.

Investors fled Kennametal's stock from the start of Wednesday's trading session. Its shares were recently trading down 6.6% at $34.45 a share on heavy volume.

"A weak first-quarter result was expected, particularly on the heels of the weakness demonstrated by Kennametal's customers," said William Blair & Co. analyst Samuel Eisner in a note to investors Wednesday. "We believe management is being prudent in reducing expectations so severely."

Overall for the quarter ended Sept. 30, the company reported a profit of $46.4 million, or 57 cents a share, down from $72 million, or 88 cents a share, a year ago. The latest period includes a penny per share accretion from the acquisition of Stellite. Sales sank 4.5% to $629.5 million. Analysts polled by Thomson Reuters expected per-share earnings of 87 cents on sales of $690 million.

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